Sectoral Lending by Ethiopian Commercial Banks: a Performance Analysis

Sectoral Lending by Ethiopian Commercial Banks: a Performance Analysis A.S.Kannan, Ph.d Scholar, School of Management, Pondicherry University, Puducherry Email: professorkannan@gmail.com Dr. S. Sudalaimuthu, Associate Professor, School of Management, Pondicherry University, Puducherry. Abstract: Competition in Ethiopian banking industry started in 1994 with the advent of the first private bank, viz., Awash International Bank. banks emerged gradually year by year till 2012, and in March 2015 there were 2 public sector banks and 16 private banks in the country. Though the public sector is given unequivocal support by the democratic government in Ethiopia, private banks do not lag behind much by showing a spirited attempt to show their performance in all fronts, especially in lending to various industries. The study attempted to examine the lending performance of commercial banks in Ethiopia and made a comparison between the lending of public sector and private sector banks. Using secondary data for 16 years from 1997-98 to 2013-14, this descriptive study found mixed growth trends in gross as well as net advances in the country for public and private banks. banks tended to show more oscillating picture in growth rates for gross advances. Mean and standard deviation values for gross advances showed gradually increasing trend over the years for private banks. In average gross lending in the country, public sector banks grabbed 55.32% and private counterparts contributed to 44.68%. Among public banks, Commercial Bank of Ethiopia is the major lender with 52.04%, and among private banks Dashen Bank is the major lender with 10.97%. banks outperformed in lending to agriculture, manufacturing industries and staff loans, while private banks shone in lending to domestic trade and services, and others. Both sector banks continued to prefer lending to import and export activities throughout the 10 years till 2013-14. Major public sector bank, i.e. Commercial Bank of Ethiopia, dominated the lending scenario of the country by having 52.04% of the average lending in Ethiopia for the 10 years from 2004-05 to 2013-14. Key Words: Advances, Commercial Banks, Ethiopia, Empirical study, Performance Evaluation. JEL Classification: G210, G280, E510 www.eecmbajournal.in 25

1.0 Introduction Banks are the financial institutions, which are legally empowered to accept deposits of money from the public, and to lend the same back to those who are in need of funds. They meet their establishment costs with the margin available from the difference of interests (earned from advances as against paid for deposits). Hence, appropriate and profitable lending of deposits of money is the key to the success of banking operations. The advances can be for short term, medium term, and long term depending on the need and nature of the funds demanded by the borrowers. Again, based on security backup for the loan, the advances can be classified as clean advances and secured advances (partially or fully). Security backup for the advances could be ranging from mortgage on land and buildings to stock hypothecation. In Ethiopia, banking started way back in 1906 when the then emperor permitted the commencement of operations by foreign correspondents in the name of Bank of Abyssinia. After a brief intervention by Italian banks in 1930s, banking in Ethiopia got nationalized in 1964, and entry of private entrepreneurs was permitted in 1994 by the democratic government. The banking industry in Ethiopia has only one development bank, viz., the Development Bank of Ethiopia (DBE), and two public sector commercial banks and 16 private sector commercial banks as of March 2015 with 2604 branches all over the country. www.eecmbajournal.in 26

Sl SAMZODHANA Journal of Management Research Table 1 showing summary list of Commercial Banks in Ethiopia Name of the Commercial Bank Year of Establishm ent Branch Network* Proportion in Branch Network Paid-in Capital (in Mn. USD)* Proportion in Capital 1 Commercial Bank of Ethiopia 1964 957 36.75% 522.73 37.95% 2 Construction & Business Bank 1974 120 4.61% 35.71 2.59% PUBLIC SECTOR BANKS 1,077 41.36% 558.44 40.54% 1 Awash International Bank 1994 205 7.87% 109.51 7.95% 2 Dashen Bank 1995 164 6.30% 106.54 7.73% 3 Bank of Abyssinia 1996 130 4.99% 73.46 5.33% 4 Wegagen Bank 1997 119 4.57% 100.54 7.30% 5 United Bank 1998 125 4.80% 68.10 4.94% 6 Nib International Bank 1999 110 4.22% 89.76 6.52% 7 Cooperative Bank of Oromia 2004 137 5.26% 51.51 3.74% 8 Lion International Bank 2008 86 3.30% 28.15 2.04% 9 Oromia International Bank 2008 146 5.61% 37.41 2.72% 10 Zemen Bank 2009 7 0.27% 29.80 2.16% 11 Bunna International Bank 2010 80 3.07% 27.07 1.97% 12 Berhan International Bank 2011 68 2.61% 27.22 1.98% 13 Abay Bank 2012 87 3.34% 26.68 1.94% 14 Addis International Bank 2012 32 1.23% 17.61 1.28% 15 Debub Global Bank 2013 22 0.84% 9.41 0.68% 16 Enat Bank 2013 9 0.35% 16.20 1.18% PRIVATE SECTOR BANKS 1,527 58.64% 818.98 59.46% All Commercial Banks 2,604 100.00% 1,377.41 100.00% * as of 31 March 2015, as per National Bank of Ethiopia Report Note: 1 USD = 20.5 ETB (average exchange rate as of March 2015) Table 1 in the previous page summarizes the banking industry in Ethiopia. As shown in the table, public sector commercial banks in Ethiopia hold 41.36% of the branch network in the country, and 40.54% of the paid-in capital of the banking industry as of March 2015. The comparative proportion for private commercial banks in Ethiopia has been 58.64% and 59.46% respectively. Among the public sector banks, Commercial Bank of Ethiopia holds 88.86% of the branch network and 93.61% of the paid-in capital. Among private sector commercial banks, the foremost private bank viz. Awash International Bank holds 13.43% of branch network, and 13.37% of the paid-in capital which are marginally ahead of its senior rivals, i.e. Dashen Bank and Wegagen Bank. www.eecmbajournal.in 27

Table 2 showing summary position of Commercial Banks in Ethiopia (as of 31 March 2015) Sector Sector Total Industry Description Industry Industry Industry Actual Actual Actual Proportion Proportion Proportion Number of Banks 2 11.11% 16 88.89% 18 100.00% Number of Branches 1,077 41.36% 1,527 58.64% 2,604 100.00% Paid-in Capital* 558.44 40.54% 818.98 59.46% 1,377.42 100.00% Stock of Deposits mobilized* 11,105.82 67.50% 5,347.25 32.50% 16,453.07 100.00% Advances Disbursed* 802.16 72.83% 299.28 27.17% 1,101.44 100.00% Advances Collected* 286.20 44.95% 350.49 55.05% 636.69 100.00% Advances Outstanding* 7,456.89 69.45% 3,280.27 30.55% 10,737.16 100.00% Source: Researcher's computation based on National Bank of Ethiopia report Note: * in Million USD (1 USD = 20.5 Ethiopian Birr as of March 2015) Table 2 above presents the summary position of Ethiopian commercial banks as of March 2015. From the table, one can understand that the two public sector commercial banks in the country held 67.50% of deposits mobilized, 72.83% of advances disbursed, and 69.45% of advances outstanding. As against this, the 16 private sector commercial banks held 58.64% of the branch network in the country, 59.46% of the capital investment in banking industry, and 55.05% of advances collected. From this, it is obvious that public sector banks out-perform private sector banks in deposits mobilization as well as loan disbursements, while the private sector banks showed their shrewdness in loan collections thus outperforming their government counterparts. 1.1 Purpose of the study The growth of banking industry depends on the growth of the advances (as they are the major sources of revenue for the banks), which in turn depends on the growth of the deposits. In a country, where there is a competition between public sector and private sector commercial banks in capturing their share in advances, it is sensible to compare their lending performances in terms of growth rate in advances. Again, lending does involve risks, and one mechanism to handle the risk is to diversify the advances to various industries. It is good to explore the extent to which banks are diversified in granting their advances to different industries and how comparable they are between public and private sector. There are occasions where the lending scenario may be dominated by one or two banks be in public or in private sector in the country, and it is good to look into that also. With this background in mind, the purposes of the study are set thus: (i) to evaluate the growth trends in commercial bank advances in the recent period; (ii) to compare the lending performance of www.eecmbajournal.in 28

public and private sector commercial banks in Ethiopia to various industries; and (iii) to establish the dominance of Ethiopian Lending scenario by a leading public sector bank. 2.0 Methodology This descriptive study tries to explain the latest trends in commercial bank lending in Ethiopia. For this purpose, it predominantly uses the secondary data from the most authentic source, viz., National Bank of Ethiopia, the central bank of the country. Annual Reports and Quarterly Bulletins for the periods from 2004-05 to 2014-15 were referred and computations of growth trends and performance were made based on the data. For the purpose of analyzing the growth trends in advances (gross / provision / net), data pertaining to fiscal years 1997-98 and 2012-13 have been taken into account. For this analysis, data pertaining to two public sector banks and six major private sector banks that have been functional since 2000 have been considered. Data pertaining to other ten private banks were not considered since they were established from 2004 onwards till 2012, and their role in lending was quite trivial (as the eight banks considered for this study handled more than 85% of lending in the country at least till 2010). Industry-wise lending data from 2004-05 to 2013-14 (10 years) have been considered for sectoral analysis. For this purpose, industry-wise lending data (for agriculture, building & construction, manufacturing, import, export, domestic trade & services, staff loans, and others) are considered for all the commercial banks in the country as when they started offering loans and advances. For the purpose of analysis and presentation of data, statistical tools such as mean, standard deviation, growth trends, comparative proportions, and percentage analysis, and correlation measures have been used in this study. These analyses have been done using Microsoft Excel and SPSS version 20. The results of the analyses are presented in the forms of tables, charts, and graphs under the following section, viz., results and discussion. 3.0 Results and Discussion The discussions under this section are presented under the following sub-heads: (i) comparative growth trends in advances; (ii) comparative summary statistics for gross advances, provision for advances and net advances; (iii) comparative lending performance of public and private sector commercial banks; (iv) comparative industry-wise (sectoral) lending performance of public and private sector commercial banks; and (v) dominance of the lending scenario by a major public sector bank. www.eecmbajournal.in 29

3.1 Comparative Growth Trends in Advances Comparative growth trends between public sector commercial banks (2 in number) and private sector commercial banks (6 in number) are presented and discussed in this subsection. Accordingly, a summary table showing comparative growth trends among public sector, private sector and all commercial banks for gross advances, provision for advances, and net advances is prepared and presented here. For this purpose, only those commercial banks which have been functional prior to 2000 are considered, for having considerable amount of data for analysis. Table 3 showing Comparative Growth Trends in (i) Total Advances, (ii) Provision for Advances, and (iii) Net Advances for Sector, Sector and All Commercial Banks in Ethiopia* YEAR GROSS ADVANCES PROVISION FOR ADV. NET ADVANCES All CBs All CBs All CBs 1998_99 4% 72% 38% 19% 79% 49% 2% 69% 36% 1999_00 3% 74% 39% 3% 110% 57% 3% 73% 38% 2000_01 1% 72% 36% 18% 61% 39% -2% 71% 35% 2001_02-10% 21% 6% 20% 58% 39% -14% 20% 3% 2002_03-7% 47% 20% 8% 162% 85% -10% 45% 17% 2003_04 1% 29% 15% 1% 52% 26% 3% 28% 15% 2004_05 16% 39% 27% 7% 23% 15% 18% 40% 29% 2005_06 17% 51% 34% 1% 22% 11% 21% 52% 36% 2006_07 9% 29% 19% 13% 32% 22% 9% 29% 19% 2007_08 41% 16% 29% -13% 41% 14% 50% 15% 33% 2008_09 17% 1% 9% -19% 13% -3% 20% 1% 10% 2009_10 13% 16% 15% -13% 2% -6% 14% 18% 16% 2010_11 24% 18% 21% 47% 0% 24% 24% 19% 21% 2011_12 39% 28% 33% 26% -1% 13% 39% 29% 34% 2012_13 12% 23% 18% -7% 9% 1% 15% 24% 19% AVERAGE 12% 35% 24% 8% 41% 25% 13% 35% 24% * Only those commercial banks which were functional prior to 2000 are included in this analysis. Source: Researcher's computation based on National Bank of Ethiopia Reports Table 3 above presents the summary of growth trends in gross advances, provision for advances and net advances for public sector, private sector and all commercial banks in Ethiopia. As to Gross Advances, the growth rate for public sector commercial banks range from -10% to 41%, with an average of 12% in the reported 15 years period; that of private sector commercial banks range from 1% to 74%, with an average of 35% in the reported period. Except for the years 2008-09, 2010-11, and 2012-13, private banks outperformed public banks in growth trends of gross advances, with outstanding growth rates recorded in 1998-99 to 2000-01, and in 2005-06. By average too, private banks registered almost triple the average growth rate for public banks in the said 15 years period. With regard to the www.eecmbajournal.in 30

provision for advances, public banks growth rate ranged from -19% to 47%, that of private banks ranged from -1% to 162%, the latter showing wider disparities in growth rates. The 15-year average for public banks was at 8% whereas for private banks at 41%. In net advances, public banks showed a range in growth rate of -14% to 50%, whereas private banks showed 1% to 73% variation. The average growth rate for public sector banks was at 13%, whereas that of private banks was 35%, thus the latter maintained their robust growth rate over their counterparts like that of gross advances. Figure 1 (in the next page) presents the growth trends in total loans and advances from 1998-99 to 2012-13 and average for these years of all the eight banks considered for this study. A careful look at the pattern of the graph reveals widely oscillating trends in growth rates for public sector banks (CBE and CBB), whereas for private banks it is mostly positive and lessoscillating (AIB, DB, BoA, WB, UB, and NIB), and that of all commercial banks (All CBs) showed a reasonably balanced growth trends in all the years. Figure 1 showing Growth Trends in Total Loans & Advances (1998-99 to 2012-13) 120% 100% 80% 60% 40% 20% 0% -20% CBE CBB AIB DB BoA WB UB NIB ALL CBs Source: Researchers computations based on National Bank of Ethiopia reports www.eecmbajournal.in 31

Figure 2 showing comparative growth trends in total advances by public, private and all commercial banks in Ethiopia 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% PUB_TLA PVT_TLA TOT_TLA Linear (PUB_TLA) Linear (PVT_TLA) Linear (TOT_TLA) Source: Researchers computations based on National Bank of Ethiopia reports Fig.2 in the previous page presented the comparative growth trends in total advances by public sector, private sector and all commercial banks (those which have been functional prior to 2000) in Ethiopia. The linear trend lines shown in the picture clearly indicated a gradually growing trend line for public sector banks; gradually declining trend for private banks; and a moderately declining trend for all commercial banks in Ethiopia. www.eecmbajournal.in 32

3.2 Comparative Summary Statistics Table 4 showing Comparative Summary Statistics for Gross Advances, Provisions and Net Advances (in Millions of Ethiopian Birr) GROSS ADVANCES PROVISION FOR ADVANCES NET ADVANCES Mean values Standard Deviation Mean values Standard Deviation Mean values Standard Deviation YEAR 1997_98 9,067.0 194.0 116.1 979.0 2.5 3.0 8,088.0 191.5 113.8 1998_99 9,785.0 233.6 128.4 1,355.0 5.2 5.3 8,430.0 228.4 125.3 1999_00 5,581.5 318.5 6,739.4 213.4 749.0 8.0 974.4 7.1 4,832.5 310.5 5,765.0 207.1 2000_01 5,734.5 441.7 6,962.9 247.6 1,009.5 12.7 1,342.8 9.8 4,725.0 429.0 5,620.1 238.6 2001_02 5,236.0 511.8 6,385.2 260.1 1,232.5 19.2 1,642.6 13.9 4,003.5 492.7 4,742.6 248.6 2002_03 4,630.0 714.5 5,548.0 331.5 1,279.0 35.5 1,695.6 20.0 3,351.0 679.0 3,852.3 316.1 2003_04 4,529.0 917.7 5,368.4 432.1 1,062.5 49.5 1,366.8 24.1 3,466.5 868.2 4,001.5 416.7 2004_05 5,206.5 1,247.3 6,151.1 542.8 1,066.5 55.7 1,352.7 20.3 4,140.0 1,191.7 4,798.4 528.0 2005_06 5,237.5 1,845.2 5,739.6 729.7 888.0 66.7 1,067.7 22.8 4,349.5 1,778.5 4,671.9 714.7 2006_07 5,544.0 2,364.5 5,960.9 885.0 788.0 85.9 849.9 27.3 4,756.0 2,278.6 5,111.0 868.1 2007_08 9,362.8 2,709.5 11,279.4 896.5 622.5 124.6 623.2 69.6 8,740.3 2,584.9 10,656.2 885.7 2008_09 11,239.5 2,726.4 13,670.5 887.6 415.7 135.8 330.5 69.7 10,823.9 2,590.6 13,340.1 890.2 2009_10 12,882.9 3,163.6 15,746.0 971.0 317.5 130.8 179.1 54.0 12,565.4 3,032.8 15,566.9 968.2 2010_11 18,854.1 3,745.5 24,221.4 1,282.9 531.4 119.3 495.7 18.8 18,322.6 3,626.2 23,725.8 1,278.6 2011_12 32,058.8 4,814.3 42,787.8 1,765.4 774.5 117.7 848.0 35.4 31,284.3 4,696.6 41,939.9 1,731.5 2012_13 36,754.7 5,869.7 49,200.3 1,907.9 977.9 129.4 1,261.3 47.0 35,776.7 5,740.3 47,939.1 1,862.1 Source: Researcher's computations based on National Bank of Ethiopia Reports Table 4 above summarizes the mean and standard deviation values for Gross Advances, Provision for Advances, and Net Advances, of and Sector Commercial Banks in Ethiopia from 1997-98 to 2012-13. From the results presented in the table, it is clear that for private banks the mean and standard deviation values are showing a steady rise all through the 15 years period, whereas they are somewhat imbalanced for public banks. This is confirmed in the chart shown below. Figure 3 showing mean values of Gross Advances of and Sector Commercial Banks in Ethiopia from 1997-98 to 2012-13 40,000.0 35,000.0 30,000.0 25,000.0 20,000.0 15,000.0 10,000.0 5,000.0-9,067.0 9,785.0 5,581.5 5,734.5 5,236.0 4,630.0 4,529.0 5,206.5 5,237.5 5,544.0 9,362.8 11,239.5 12,882.9 18,854.1 32,058.8 36,754.7 www.eecmbajournal.in 33

Figure 3 in the previous page shows the mean values of gross advances of public and private commercial banks in Ethiopia from 1997-98 to 2012-13. From the graph it can be understood that the mean values of gross advances show gradually increasing trend over the years for the private sector commercial banks, though the rate of growth is not very impressive as such. For the public sector banks, the mean values show a dip in the middle period, i.e. from 1999-2000 to 2006-2007, and thereafter a steep increase in the trend is observed. Especially between 2011-12 and 2012-13, the growth rate achieved by the public sector commercial banks as to gross advances is quite phenomenal, as can be observed from the graph presented in figure 3. 3.3 Comparative Lending Performance Interesting trends are revealed by the lending performance of commercial banks in Ethiopia between 1997-98 and 2012-13. Proportional share of public and private sector commercial banks in gross advances, in provision for advances, and in net advances are presented in the graphs below. Figure 4 showing the proportion of public and private sector commercial banks in gross advances (from 1997-98 to 2012-13) 2012_13 68% 2011_12 69% 2010_11 63% 2009_10 58% 2008_09 58% 2007_08 54% 2006_07 44% 2005_06 49% 2004_05 58% 2003_04 62% 2002_03 68% 2001_02 77% 2000_01 81% 1999_00 85% 1998_99 89% 1997_98 92% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% TLA_PVT_PROP TLA_PSB_PROP www.eecmbajournal.in 34

Figure 4 above reveals contrasting trends for public and private sector commercial banks for gross advances. For public banks, the proportion of gross advances in total was at the peak in the earliest reporting period, i.e. 1997-98. It showed a continuous declining trend till it reaches the lowest point (44%) in 2006-07, thereafter started showing gradual rise in the proportion. banks showed a gradual increase in gross advances continuously till 2006-07; thereafter it started marginally declining continuously. Figure 5 showing proportion of public and private banks share in provision for advances (from 1997-98 to 2012-13) 2012_13 72% 2011_12 69% 2010_11 60% 2009_10 45% 2008_09 50% 2007_08 62% 2006_07 75% 2005_06 82% 2004_05 86% 2003_04 88% 2002_03 92% 2001_02 96% 2000_01 96% 1999_00 97% 1998_99 98% 1997_98 99% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% PRV_PVT_PROP PRV_PSB_PROP www.eecmbajournal.in 35

Figure 6 showing proportion of public and private banks share in net advances (from 1997-98 to 2012-13) 2012_13 68% 2011_12 69% 2010_11 63% 2009_10 58% 2008_09 58% 2007_08 53% 2006_07 41% 2005_06 45% 2004_05 54% 2003_04 57% 2002_03 62% 2001_02 73% 2000_01 79% 1999_00 84% 1998_99 88% 1997_98 91% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% NLA_PVT_PROP NLA_PSB_PROP Figure 5 and 6 in previous page presented the proportion of public and private sector commercial banks in provision for advances and in net advances respectively. Provision for advances of public banks showed a continuous gradual decline till 2009-10, from then onwards it started rising gradually. Contrarily, private banks showed continuous gradual increments till 2009-10, thereafter there was a marginal decline gradually. Similar trend is observed in the behavior of net advances for both sets of banks, with the break-point occurring in 2006-07. Table 5 given below presents the summary of average position in all the three. Table 5 showing average proportion of gross, provision and net advances Average Proportion Gross Advances Provision for Advances Net Advances Sector Commercial Banks 67% 79% 65% Sector Commercial Banks 33% 21% 35% www.eecmbajournal.in 36

Accordingly, the average proportion in gross and net advances is maintained at 2:1 proportion between public and private banks, whereas for provision for advances, the proportion changed to 4:1. Table 6 showing correlation between and Sector Commercial Banks in Ethiopia Description Correlation Coefficient Remarks Indications Gross Advances 0.9107 Highly Positive correlation Strong Positive Association Provision for Moderately Negative -0.4309 Advances correlation Considerable Negative Association Net Advances 0.9187 Highly Positive correlation Strong Positive Association Table 6 above shows the correlation coefficient between public and private sector banks. In respect of gross advances and net advances, both sector banks show highly positive correlation thus indicating strong positive association between the two. Provision for advances shows moderately negative correlation, indicating considerable negative association between the two. 3.4 Comparative Sectoral Performance Figure 7 showing average proportion in Gross lending by individual commercial banks in Ethiopia (from 2004-05 to 2013-14) 60.00% 50.00% 52.04% 40.00% 30.00% 20.00% 10.00% 0.00% 3.28% 7.37% 10.97% 6.46% 5.49% 4.79% 5.35% 1.44% 0.95% 1.05% 0.93% 0.62% 0.66% 0.74% 0.26% 0.14% 0.18% CBE CBB AIB DB BOA WB UB NIB CBO LIB OIB ZB BIB BUIB AB AdIB DGB EB Source: Researchers computations based on National Bank of Ethiopia reports Figure 7 in the previous page showed average proportion in gross lending by individual commercial banks in Ethiopia. It presented the average picture for all the 18 (2 public and 16 private) banks in the country for 10 years from 2004-05 to 2013-14. Accordingly, public sector banks grabbed 55.32% (CBE 52.04% + CBB 3.28%) of the average lending in the country in the recent decade, while all the private banks contributed 44.68% of the average www.eecmbajournal.in 37

gross lending (with DB contributing as high as 10.97% which is nearly a fourth of the private banks share, followed by AIB 7.37% and BoA 6.46%, and DGB the least with 0.14%). Figure 8 showing Industry-wise proportion of Gross Advances by and Sector Commercial Banks in Ethiopia from 2004-05 to 2013-14 500.00% 450.00% 400.00% 350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00% 0.00% 2004_05 2005_06 2006_07 2007_08 2008_09 2009_10 2010_11 2011_12 2012_13 2013_14 AGRI BCON MFG. IMP. EXP. DTS STAFF OTHERS Source: Researchers computations based on National Bank of Ethiopia reports Figure 8 above shows the industry-wise proportion in gross advances by public sector and private sector commercial banks from 2004-05 to 2013-14. A careful observation of the graph reveals many interesting things. banks heavily outperform private banks in lending to agricultural industry all the years; whereas private banks outperform public banks in lending to domestic trade and services industry in most of the years. To building and construction industry, both sector banks have been lending more or less the same proportions in earlier years, whereas the proportion for public banks kept declining of late. It is clearly evident that the thrust of public sector banks shifted favorably towards manufacturing industry as the gross lending to manufacturing kept increasing in the recent years, while it keeps declining for private banks thus indicating a paradigm shift in lending dimensions in the country. Import and export industry continue to be the favorite of the commercial banks in the country be it in public sector or in private sector, as it is widely believed that this industry brings foreign exchange earnings to the economy. Gross lending for staff loans is assuming greater www.eecmbajournal.in 38

proportions for public sector banks, whereas other lending is comparatively greater for private sector banks in the country. 3.5 Dominance in the Ethiopian lending scenario Banks entered into the banking industry only in 1994, and one by one they got established till 2012. Because of this slow, though steady influx of private entrepreneurs in banking in the country, the dominance of public sector banks in the lending scenario is evident. Figure 9 showing comparative lending performance of public and private sector commercial banks in Ethiopia (2004-05 to 2013-14) 100.00% 90.00% 80.00% 70.00% 40.00% 51.72% 56.72% 51.09% 45.67% 47.71% 42.25% 36.65% 38.18% 36.73% 44.67% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 60.00% 48.28% 43.28% 48.91% 54.33% 52.29% 57.75% 63.35% 61.82% 63.27% 55.33% Source: Researchers computations based on National Bank of Ethiopia reports Figure 9 above shows the proportion of public and private sector banks in gross lending in the country from 2004-05 to 2013-14. While the private banks showed dominance in early three years (2005-06 to 2007-08), the public banks had upper hand in rest of the years, and in the average performance for the decade. www.eecmbajournal.in 39

Figure 10 showing proportion in gross lending by the leading public sector bank, i.e., Commercial Bank of Ethiopia (from 2004-05 to 2013-14) 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 55.22% 42.84% 38.10% 44.72% 50.22% 50.99% 54.98% 61.45% 60.29% 61.61% 52.04% CBE Linear (CBE) Source: Researchers computations based on National Bank of Ethiopia reports Figure 10 in the previous page clearly established the absolute dominance of the gross lending in the country by a single major public sector bank, i.e. Commercial Bank of Ethiopia. As shown in the chart, the lowest proportion for CBE has been in 2006-07 (38.10%), and the highest is in the latest year 2013-14 (61.61%), with the 10-year average for this single bank as 52.04%, thus underling the dominance of CBE over the lending scenario of Ethiopia. The linear trend also indicates the marginally rising slope for the trend line, thus indicating the continued reigning by the state-owned senior on the lending scenario. 4.0 Major Findings of the study In respect of total amount of loans and advances, public sector commercial banks in Ethiopia showed a growth rate ranging from -10% to 41% with an average of 12% between 1997-98 and 2012-13. For the same period, private banks showed a growth rate in the range of 1% to 74% and an average of 35%. Thus, private banks performed better than public banks in total advances in the said period. Similar trends were observed in provision for advances, as well as net advances. Analyzing the growth trends for individual banks, it is found that public sector banks showed more oscillating trends in growth rates for gross advances, while private banks rate was more positive and less-oscillating. www.eecmbajournal.in 40

The linear trend lines indicated a gradually growing trend line for public sector banks; gradually declining trend for private banks; and a moderately declining trend for all commercial banks in Ethiopia. For private banks the mean and standard deviation values are showing a steady rise all through the 15 years period, whereas they are somewhat imbalanced for public banks. The mean values of gross advances show gradually increasing trend over the years for the private sector commercial banks, though the rate of growth is not very impressive as such. For the public sector banks, the mean values show a dip in the middle period, i.e. from 1999-2000 to 2006-2007, and thereafter a steep increase in trend is observed. For public banks, the proportion of gross advances in total was at the peak in the earliest reporting period, i.e. 1997-98. It showed a continuous declining trend till it reaches the lowest point (44%) in 2006-07, thereafter started showing gradual rise in the proportion. Banks showed a gradual increase in gross advances continuously till 2006-07, thereafter started declining marginally. The average proportion in gross advances by public banks was 67%; in provision for advances 79%, and in net advances 65%. Thus, except for provision for advances, private banks garnered one-third share in gross advances as well as net advances on an average form 1997-98 to 2012-13. While there were highly positive correlation between public and private banks as to gross advances and net advances, the provision for advances showed a moderately negative correlation between the two sector banks. In average gross lending in the country, public sector banks grabbed 55.32% and private counterparts contributed to 44.68%. Among public banks, CBE is the major lender with 52.04%, and among private banks DB is with 10.97%. Industry-wise lending by Ethiopian commercial banks showed mixed trends. banks outperformed in lending to agriculture, manufacturing industries and staff loans, while private banks shone in lending to domestic trade and services, and others. Both the sectors continued to prefer lending to import and export activities throughout the 10 years till 2013-14. While the private banks showed dominance in gross lending in early three years (2005-06 to 2007-08), the public banks had upper hand in rest of the years, and in the average performance for the decade. www.eecmbajournal.in 41

Major public sector bank, i.e. Commercial Bank of Ethiopia, dominated the lending scenario of the country by having 52.04% of the average lending in Ethiopia for the 10 years from 2004-05 to 2013-14. 5.0 Practical Implications of the study The study is significant for it analyses the latest trends in lending performance of Ethiopian commercial banks in general, and comparative analysis between public sector and private sector commercial banks in Ethiopia. The study presents a progress report of the lending performance of Ethiopian banking industry as of March 2015. The findings of the study will be useful for the Ethiopian banks as well as to the economy watchers, since bank lending leads to economic growth. Academia will also find it interesting and useful in order to further the study in future. At last, this paper adds to knowledge base on banking industry in Ethiopia, which has limited studies on the lending side so far. 5.1 Research Limitations and Scope for further research The study considered only the secondary data from 1997-98 to 2013-14, based on its availability from the official sources. Since the second and third generation of private commercial banks in Ethiopia started operating from 2004 and 2010 respectively, the data availability is too limited for a meaningful comparison and analysis. This study suffers from this limitation, as it is carried out based on data till 2014. Future studies may overcome this limitation, by taking up data from a matured banking industry. REFERENCES 1. Dashen Bank, Financial Reports from 2001-2002 to 2013-2014, available at https://www.dashenbanksc.com/financialreport/index.html, accessed in July 2015. 2. National Bank of Ethiopia, Annual Reports for different years from 2004-2005 to 2013-2014, available at http://nbe.gov.et/publications/annualreport.html, accessed in July 2015. 3. National Bank of Ethiopia, Quarterly Bulletin, Vol.31, Quarter 3, March 2015, available at http://nbe.gov.et/publications/quarterlybulletin.html, accessed in Aug.2015. www.eecmbajournal.in 42